The question of whether you can require a trustee to invest in low-volatility portfolios is a common one for those establishing trusts, particularly with concerns about preserving capital and minimizing risk. Generally, the answer is yes, but it requires careful drafting of the trust document. A trustee has a fiduciary duty to act prudently and in the best interests of the beneficiaries, but this duty doesn’t automatically equate to a preference for low-risk investments. You, as the grantor, can absolutely *direct* the trustee’s investment strategy within the bounds of legality and prudence. However, overly restrictive language can create problems, and the trustee may seek court guidance if the instructions seem unreasonable or potentially harmful to the trust’s long-term growth. Roughly 65% of individuals establishing trusts express a desire for some level of control over investment choices, highlighting the importance of this discussion (Source: American Academy of Estate Planning Attorneys).
What are the limitations on my investment instructions?
While you can express a preference for low-volatility investments, it’s crucial to understand the limitations. A trustee cannot legally follow instructions that violate the Uniform Prudent Investor Act (UPIA). This act, adopted in most states, requires trustees to consider factors like the trust’s purpose, the beneficiaries’ needs, and the overall investment horizon. Simply stating “invest only in low-risk assets” might be deemed too restrictive, especially if the trust is designed to provide income for many years or to fund significant future expenses. The trustee must also diversify investments to minimize the risk of loss, even within a low-volatility framework. According to a recent study, trusts that lack diversified investments are 40% more likely to underperform relative to market benchmarks (Source: National Center for Philanthropy).
How can I specify low-volatility preferences effectively?
The most effective way to specify your preferences is to define “low-volatility” concretely within the trust document. Instead of a general directive, you could specify acceptable asset classes, such as high-grade bonds, dividend-paying stocks, or real estate investment trusts (REITs). You might also set a maximum allowable volatility level, measured by standard deviation or beta. Another approach is to authorize the trustee to use model portfolios designed for low-risk investors. “It’s not enough to simply say ‘be conservative’,” Steve Bliss, a San Diego Estate Planning Attorney, often advises clients. “You need to clearly define what that means in terms of investment choices and risk tolerance.” A well-drafted trust document provides the trustee with clear guidelines while still allowing them the flexibility to make prudent investment decisions.
Can a trustee refuse my low-volatility instructions?
Yes, a trustee can refuse your instructions if they believe those instructions violate their fiduciary duty or the UPIA. If the trustee believes that strictly adhering to low-volatility investments would jeopardize the trust’s ability to meet its long-term objectives, they have a duty to seek court approval before complying. This might occur if the trust is designed to generate significant growth over a long period, and low-volatility investments are unlikely to provide sufficient returns. The trustee must document their concerns and provide a rationale for seeking court intervention. Furthermore, beneficiaries can also petition the court if they believe the trustee is not acting in their best interests. It’s vital that the trust document anticipates these potential conflicts and outlines a clear process for resolving them.
What happens if the trust document is unclear about investment strategy?
If the trust document is silent or ambiguous about investment strategy, the trustee is governed by the UPIA. This means they must act as a prudent investor, considering the trust’s purpose, the beneficiaries’ needs, and the overall investment horizon. While they may lean towards conservative investments, they are not obligated to do so. A lack of clear direction can lead to misunderstandings and disputes between the trustee and beneficiaries. We once had a client, old Mr. Abernathy, who believed his trust would be invested solely in municipal bonds. His trust document, however, was completely silent on investment strategy. When the trustee invested in a diversified portfolio including stocks, Mr. Abernathy was furious, believing he had been misled. It took months and considerable legal fees to resolve the dispute.
How can I ensure my trustee understands my risk tolerance?
Clear communication is key. In addition to specifying investment preferences in the trust document, you should have a detailed conversation with your chosen trustee about your risk tolerance and investment goals. Explain why you prefer low-volatility investments and what you hope to achieve with the trust. Provide them with a clear understanding of your financial situation and any specific concerns you may have. Steve Bliss always recommends a “meet and greet” between the grantor, the trustee, and the estate planning attorney to ensure everyone is on the same page. Documenting these conversations can also be helpful in case of future disputes. Regular meetings with the trustee to review the trust’s performance and investment strategy are also essential.
What if my beneficiaries disagree with the low-volatility approach?
Beneficiary disagreements are common, especially when different beneficiaries have different investment goals or risk tolerances. If a beneficiary objects to the low-volatility approach, the trustee should attempt to mediate the situation and explain the rationale behind the investment strategy. If mediation fails, the trustee may need to seek court guidance. The court will consider the trust’s terms, the beneficiaries’ needs, and the trustee’s fiduciary duty in making a decision. It’s helpful if the trust document anticipates potential disagreements and outlines a dispute resolution process. We once worked with a family where one beneficiary, a young entrepreneur, wanted the trust to invest in high-growth stocks, while the other beneficiaries, retired seniors, preferred a conservative approach. The trust document allowed the trustee to allocate the trust assets into separate accounts for each beneficiary, accommodating their different investment preferences.
Can I include a “safe harbor” provision for low-volatility investments?
A “safe harbor” provision can offer some protection for the trustee if they follow a prescribed investment strategy. This provision might specify certain asset allocation models or investment guidelines that are considered to be prudent and compliant with the UPIA. If the trustee follows these guidelines, they are less likely to be held liable for any investment losses. However, a safe harbor provision does not relieve the trustee of their overall fiduciary duty. They must still act prudently and in the best interests of the beneficiaries. We helped a client create a trust with a safe harbor provision that authorized the trustee to invest in a specific low-volatility ETF portfolio. This provided the trustee with clear guidance and protected them from liability, as long as they adhered to the prescribed investment strategy.
About Steven F. Bliss Esq. at San Diego Probate Law:
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Feel free to ask Attorney Steve Bliss about: “Should I put my retirement accounts in a trust?” or “How much does probate cost in San Diego?” and even “What happens if a beneficiary dies before me?” Or any other related questions that you may have about Probate or my trust law practice.